“If Dr. Siegel had his way, all portfolios would be entirely comprised of equities with no finger in the bond pie,” Kass writes clients this morning. “Risk-parity funds take an opposite approach. The theory is that equities contribute substantial volatility to the traditional portfolio.”

Kass goes on to estimate that a traditional 60% stock, 40% bond portfolio has 90% of the stock market’s volatility. What’s the point of that? “Risk-parity funds reduce volatility with a substantial bond position and a small percentage of equities, commodities and credit instruments and apply leverage to enhance returns,” he notes.

You can watch this in real life through a relatively young mutual fund. AQR Risk Parity I (AQRIX) slightly underperformed the S&P 500 last year, rising 14.26%. But the previous year, its first full in existence, it rose 5.35%. The broad stock benchmark ended almost exactly flat (or up 2.1% on a total return basis). The risk-parity strategy is slightly ahead for the period.

You can’t read much into two years of performance, but it’s a comparison worth watching.

Correction 10:08: The original version of this post misstated Doug Kass’ name, since corrected.

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